Humana Inc.

Good day, and thank you for standing by. Welcome to the Humana fourth quarter 2025 earnings conference call. At this time, all participants are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, which are available on our website. We will begin this morning with brief remarks from Jim Recton, Humanities President and Chief Executive Officer, and Chief Financial Officer, Celeste Millay. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission, and our fourth quarter 2025 earnings press release as they relate to forward-looking statements along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements in future filings or communications regarding our business or results. Today's press release, our historical financial news releases, and our filings with the SEC are also available on our investor relations site. All participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP. Management's explanation for the use of these non-GAAP measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, the call is being recorded for replay purposes. The replay will be available on the investor relations page of Humana's website, humana.com, later today. With that, I will turn the call over to Jim.

Thank you, Lisa. Good morning, everyone. Thank you for joining us. Let me hit the headlines. We are pleased with our solid 2025 performance. We continue to feel good about our membership growth. We remain committed to a consumer-centric strategy that is responsive to what our patients and members want and need. And we also recognize that to do that, we must deliver a stable and compelling margin that requires regularly adapting to our funding environment. We will continue to do this to adapt to our funding environment to ensure that we stay on track with unlocking the earnings potential of the business by 2028 as we laid out at our 2025 Investor Day. Now, I will briefly describe the progress we are making operationally, and as usual, I will frame my comments today around the four drivers of our business. That is, first, product and experience, which drive customer retention and growth. Second, clinical excellence, which delivers clinical outcomes and medical margin. Third, highly efficient operations. And fourth, our capital allocation and growth in both CenterWell and Medicaid. I will wrap up with additional commentary on the advanced rate notice. Most of my time today will be spent on Medicare product and experience, given the continued concerns that have been expressed by the market. So let me start there. First, let me clarify what I believe are the real questions related to growth. Is this quality membership with attractive economics? Can we operationally absorb the growth, and are we sufficiently positioned to fund the growth? Second, let me take a moment to remind everyone how we think about growth. Our focus is on maximizing customer lifetime value and customer NPV. To maximize lifetime value and NPV, two things must be true. We must be priced appropriately to a sustainable and compelling margin, and we must retain our membership year-over-year. The way that we do that is by investing in an exceptional experience that fuels improved health outcomes and member retention. We also have moved away from past strategies built around loss leader plans. We design all of our plans to be priced to a sustainable margin, adjusting for stars. Third, let me provide an overview of our growth and why we like the growth. We grew by approximately 1 million members, or 20% in AEP. Our retention rate improved over 500 basis points year over year. And I keep emphasizing that that is good growth. Over 70% of our new sales were switchers from competitor plans. On average, switchers have better economics. Now, I recognize that there are concerns about switchers from plan exits that our competitors have done. We did not have a high percentage of members impacted by competitor plan exits. we absorbed approximately 12% of these members. That is notably less than our market share. Seventy percent of new sales were in contracts with four stars or better, and nearly 30% of our new sales were Bounce Back members. So, these are members that we have seen before in previous years. We recognize them, and we are pleased with the mix. Over 75% of our new sales were from higher lifetime value channels, so they're from better sales channels. This is nearly a 10 percentage point improvement year over year. And again, we view this as a very positive development. When we look at full year 2026, we do anticipate individual MA membership growth of approximately 25%. And I will continue to remind everybody that as we collect new information and as the market evolves, we are continuing to manage our go-to-market strategy dynamically. We have levers to pull if and when needed, and we are constantly evaluating that. Now, fourth, let me briefly touch on the economics of our growth. We expect our new members to be accretive to the enterprise in 2026. We also continue to expect that when normalizing for stars, our 2026 pricing results in a doubling of individual MA margin year over year. My final point on growth is that we feel good about our operational capacity to absorb the growth. As we previously stated, this is a focus area for us. We are committed to not outgrow our operational capacity. and to ensure a quality experience and quality care for our members. We have been very much managing this proactively. The early signs on our ability to onboard are positive. In January, during the height of onboarding, we'll touch on just a few examples, we reduced our complaints to Medicare year over year. We improved our transactional net promoter score, so this is a measure of customer service when members interact with our service center or contact center, and we increased our completion rate for health risk assessments. And I'd also just point out that complaint to Medicare, CTMs, and health risk assessments, HRAs, these are both star metrics where we are ahead of where we were a year ago in both of these areas. So let me close with this. we expect our growth to be accretive in-year. But more importantly, it further fuels our ability to unlock our earnings potential by 2028, as we laid out at Investor Day. In recognition of the high level of interest in our overall growth strategy, President of Enterprise Growth, David Dittenfoss, will join Celeste, George, and me again today for Q&A. So now let me briefly turn to clinical excellence and touch on our STARS performance. Efforts to strengthen our STARS program continue to progress as anticipated. Our outlook remains the same as previously communicated. We feel good about our operational progress so far. We continue to be confident that we are on the right track to return to top quartile STARS results in BY28. Once the hybrid season is complete next quarter, we will provide some additional visibility into our final operating results. However, we will not speculate on thresholds. Turning to highly efficient operations, we are making meaningful progress, which is evident in our 2026 admin expense ratio. Celeste will provide more color on the drivers of this improvement. And regarding capital allocation, we continue to grow our Medicaid and center wall footprint. Medicaid now spans 13 states, including Georgia and Texas, which are anticipated to launch next year. We also hope to soon announce a strategic acquisition in the primary care space. Celeste will also provide color on our capital efficiency efforts that ensure that we have the capacity to fund both our member growth and some continued M&A while protecting our credit rating, which is a priority. Before concluding today, I also want to touch on the advance rate notice. I understand, I recognize that there is concern around the rate notice. As I've said in the past, Medicare Advantage sits at the intersection of U.S. fiscal pressures and a program that is incredibly popular with seniors. Every administration wrestles with how to balance these two forces. We are committed to always protecting our consumers the best we can, and we're very aware that we must do that within the constraints of the annual funding environment. If that funding environment cannot fully support our benefit structure, then we will adapt as we have in the past. But right now, we must wait and see where the final rate notice comes in. So, in conclusion, we expect to keep moving forward with margin progression in 2026 adjusted for STARS. We continue to feel good about the way our member growth is setting us up for this year and subsequent years. We are making progress on STARS. We will adapt to the rate notice once it's final. Before turning it over to Celeste, I am pleased to share that Aaron Martin joined the company in January as president of Medicare Advantage and a member of the enterprise leadership team. Aaron joins Humana with vast experience in healthcare, including a focus on making healthcare more convenient, engaging, and valuable to customers. He will be working closely with George and the team over the coming months and will elevate to the president of insurance role upon George's retirement. We're excited to have Aaron on the team and expect that you will have the opportunity to hear from him later this year. With that, I will turn it over to Celeste for a few remarks before we go to Q&A.